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INITIAL CLAIMS: THE POSITIVE STREAK CONTINUES

Takeaway: Looking past the Easter-driven seasonality, this morning marks the fifth week in a row of strong data initial claims data.

Labor Continues to Improve

Easter week is notoriously choppy from a data standpoint so investors should take the single-week seasonally-adjusted initial claims data with a grain of salt. In fact, in the past decade, the average w/w change has been +20k, which is more or less in-line with the 25k increase seen this week. Our preferred method remains looking at the rolling NSA claims on a y/y basis. On that measure, the level of newly unemployed Americans was lower by 11% year-over-year, which was slightly worse than the prior week's 12% decline, but still a very strong rate of y/y improvement. Since the start of 2014, that's the second fastest rate of improvement we've seen, eclipsed only by the previous week's 12% figure. The data in hand so far continues to bode well for the April NFP jobs report due out next Friday, May 2.

 

The Data

Prior to revision, initial jobless claims rose 25k to 329k from 304k WoW, as the prior week's number was revised up by 1k to 305k.

 

The headline (unrevised) number shows claims were higher by 24k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 4.75k WoW to 316.75k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -11.0% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -12.0%

 

INITIAL CLAIMS: THE POSITIVE STREAK CONTINUES - 1

 

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Yield Spreads

The 2-10 spread was unchanged at 226 bps. 2Q14TD, the 2-10 spread is averaging 230 bps, which is lower by -9 bps relative to 1Q14.

 

INITIAL CLAIMS: THE POSITIVE STREAK CONTINUES - 15

 

INITIAL CLAIMS: THE POSITIVE STREAK CONTINUES - 16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 



CAKE: Still Short

Takeaway: Estimates have come down, but the stock hasn't yet followed suit.

CAKE remains on the Hedgeye Best Ideas list as a SHORT.

 

CAKE reported mixed results AMC, beating top line estimates by 61 bps and missing bottom line estimates by 1192 bps.  Labor and, to a lesser extent, food costs pressured the P&L in the quarter as restaurant level margins decreased approximately 70 bps YoY.

 

System same-store sales increased 0.9% despite management citing a negative 2% impact from severe winter storms and a holiday shift.  This includes a 1.2% increase at The Cheesecake Factory and 2.9% decline at Grand Lux Café.  Chairman and CEO David Overton highlighted notable strength in three of CAKE’s largest markets: California, Florida and Texas.  CAKE’s same-store sales continue to outperform the broader casual dining industry.  However, we estimate that traffic was down 1.0% in the quarter, making it the sixth consecutive quarter of negative traffic.

 

Management guided down FY14 EPS to $2.24-2.33 from prior $2.29-2.41.  They also reiterated their full-year commodity inflation outlook of 3-4% led by salmon and shrimp.  Although meat and dairy prices are higher than anticipated, they are expected to be offset by the easing of other commodities.  Management did not disclose what these other commodities are.

 

To be clear, this is by no means a structural short.  CAKE has been and continues to be a very strong operating company.  However, we continue to believe that the company will be negatively impacted by looming margin pressure in 2014. 

 

With that being said, our 4Q and 1Q catalysts have passed and although earnings estimates have been revised down noticeably, the stock has not followed suit.  We expect price to more properly reflect fundamentals in the near-term.  On the positive side impressive same-store sales momentum, strong brand relevance and shareholder friendly practices continue to support the stock.

 

 

What we liked:

  • 1.2% same-store sales at The Cheesecake Factory, despite operating in a difficult environment.
  • Same-store sales booming in its three largest domestic markets (up approximately 3% in 1Q).
  • 70 bps benefit to SSS in 2Q due to timing shift.
  • Food cost inflation outlook for the full-year remains unchanged at 3-4%.
  • Shareholder friendly capital allocation.  Plan to use all FCF in FY14 to fund dividends and share buybacks.
  • International stores are strong performers and the growth potential is promising.

What we didn’t like:

  • FY14 EPS guided down to $2.24-2.33 from prior $2.29-2.41.
  • Labor line was disruptive in 1Q due to higher than anticipated group medical costs and productivity inefficiencies as a result of volatile weather/traffic.
  • Traffic was down 1.0%, making it the sixth consecutive quarter of negative traffic.
  • Commodity inflation remains a risk, although management appears to have this under control.

CAKE: Still Short - 1

 

CAKE: Still Short - 2

 

 

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


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Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Bonds Don’t Care About Facebook

Client Talking Points

JAPAN

Maybe they should split the Nikkei 7 for 1, because this sick puppy can’t even find a bid on Nasdaq futures ripping. Nikkei is down another -1% overnight as the US Dollar Devaluation versus the Yen remains the FX correlation position to keep on. 

OIL

Putin Power, yep. He gets paid in Petro Dollars — don’t forget that. After holding my TREND line of support yesterday, WTI crude is up to $101.70 this morning and has no resistance to $105.03. This is a big time #ConsumerSlowing catalyst for the United States.

UST 10YR

The bond market really couldn’t care less about Facebook or the Apple iSplit.  The 10-year yield is DOWN on the week to 2.70% and the Yield Spread continues to compress. More classic US #GrowthSlowing signals.

Asset Allocation

CASH 30% US EQUITIES 0%
INTL EQUITIES 10% COMMODITIES 18%
FIXED INCOME 22% INTL CURRENCIES 20%

Top Long Ideas

Company Ticker Sector Duration
HOLX

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds.  Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.

OC

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.

DRI

Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road

TWEET OF THE DAY

Gold $1277 is just too high - can someone #iSplit that for the retail brokers too? @KeithMcCullough

QUOTE OF THE DAY

"For every minute you are angry you lose sixty seconds of happiness." - Ralph Waldo Emerson

STAT OF THE DAY

GE is in discussions to buy French industrial firm Alstom SA, according to Bloomberg. The deal may be worth more than $13 billion, or roughly 25% above Alstom's current market value. The company also makes power plant equipment. A deal could be announced as early as next week. (Bloomberg)


Join Today's Call: Marijuana Legalization: The Debate Begins. 2pm EST

We look forward to hosting a special call Marijuana Legalization: The Debate Begins, featuring Dr. Beau Kilmer, Codirector of RAND Corporation’s Drug Policy Research Center, today at 2:00pm EDT.

 

 

CALL OBJECTIVE 

Dr. Kilmer will provide a framework for assessing the marijuana policy landscape, incorporating his studies on drugs as a RAND researcher and specifically his work on marijuana legalization. He’ll discuss such topics as State versus Federal regulation, the key decisions policy makers face, his “8 Ps” framework, and social costs. We look forward to a robust Q&A on this very hot topic.

 

Join Today's Call: Marijuana Legalization: The Debate Begins. 2pm EST - pic. Smoking Marijuana Hit

 

ABOUT DR. BEAU KILMER

Beau Kilmer is a senior policy researcher at the RAND Corporation, where he codirects the RAND Drug Policy Research Center. He is also a professor at the Pardee RAND Graduate School. His research lies at the intersection of public health and public safety, with a special emphasis on substance use, illicit markets, crime, and public policy.

 

Some of his current projects include estimating the size of illegal drug markets, assessing the consequences of alternative marijuana policies, measuring the effect of South Dakota's 24/7 Sobriety Program on drunk driving and domestic violence outcomes, and evaluating other innovative programs intended to reduce violence.

 

Dr. Kilmer's research has appeared in leading journals such as AddictionAmerican Journal of Public HealthJournal of Quantitative CriminologyProceedings of the National Academy of Sciences, and his essays have been published by the BBCCNNLos Angeles TimesNew York TimesWall Street Journal, and USA Today.

 

His book Marijuana Legalization: What Everyone Needs To Know (co-authored with Jonathan Caulkins, Angela Hawken, and Mark Kleiman) was published by Oxford University Press in 2012. Before earning his doctorate at Harvard University, Kilmer received a Judicial Administration Fellowship that supported his work with the San Francisco Drug Court. 

 

 

CALL DETAILS

Toll Free Number:

Direct Dial Number:

Conference Code: 547194#

Materials: CLICK HERE (Supplemental materials will be available approximately one hour prior to the start of the call)

 

Please email  for more information.

 

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst

 



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